Retirement capital could fund studying

Let’S face it, there is no incentive to save in an interest-bearing account.

With pre-tax rates at about 5% a year, even tax exemptions and tax-preferred savings accounts do not do the trick. Inflation slowly eats it all away.

On the other hand, the proposed tax deductions for contributions to retirement funds, coupled with tax-free growth in the fund, are far more attractive. Not many of us will exceed the 2014-15 limits for tax-deductible contributions of 27.5% of taxable income, or R350,000 a year.

If one then adds the estate duty concessions on retirement fund capital, one can anticipate that retirement funds will soon replace trusts as the estate-planning vehicle of the future. There is just one catch. One has to wait for retirement age, usually 55, before accessing capital.

Some resort to desperate measures to access retirement capital, even going so far as resigning from jobs or getting divorced. The substantial tax paid on premature withdrawal does not deter them. No wonder the National Treasury is looking at mandatory preservation rules for all retirement funds.

It is difficult to encourage the young to lock up their investments in a retirement fund until 55. Even the threat of 30-plus years in a retirement complex does not get through when you are young.

Two pillars of successful financial planning are: buy a house and pay it off while you are young, and educate your children. Traditionally we have saved towards these goals. But recent surveys have shown a remarkable decline in these disciplines. South Africans are struggling to put bread on the table, let alone save. It creates the perfect environment for loan sharks — and few ever recover from that encounter.

Perhaps we could make a difference by encouraging “healthy debt”. Could retirement funds not stand security for the deposit component of a first-time home owner? Similarly, could retirement fund capital not be used as security for tertiary education student loans that responsible children will repay after graduation?

It would provide many with a tangible benefit from their retirement fund savings while they are still young enough to enjoy it. Maybe then they would be encouraged to save for their retirement.

Originally published in the Sunday Times: Money & Careers Tax Talk column.

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